When is Nest going to become a pension scheme?

Michael Clark, as usual is on the money

Nest’s submission to the Work and Pensions Select Committee is not breaking new ground

“The pension freedoms have introduced a new set of set of economic risks for savers. These include longevity risk – the risk of running out of money altogether, or not living as well as they might due to fear of running out of money.

“Also, ongoing exposure into retirement to investment risks and the need for ongoing management of those investments. Due to cognitive decline as we age, members are also likely to become less able to make decisions about their retirement savings over time.”

But Nest is , by dint of its size and coverage, the nation’s second state pension. In one of its internal surveys it found 38% of a sample of its members thought Nest would provide additional state pension, a fact delivered by Nest’s customer service supremo Ray Chinn at a conference (but never published).

I doubt many of Nest’s 8 million members have thought much about how they will get their money out , until they are of a “pension age”. Nest has positioned itself as providing a Nest egg.

I suspect that those who are over 55 and  Nest savers , are not taking advice or even talking to Pension Wise. I suspect that most are using Nest , consider their pension pot an egg that’s waiting to hatch a pension. That was always the plan.

In its early days, Nest set up an annuity carousel designed to offer members an annuity on a rotational basis. This is how Nest explained their at retirement plans to the WPSC in 2012

When the time comes to buy their retirement income, members will have access to our Retirement Panel, where they can request quotes and check on what sort of income they could get with their pot. Uniquely our panel will allow members who have pots of just £1,500 to convert them into an income for life.

They’ll also be able to explore the open market option and shop around for a retirement income on the open market.

Then came its bizarre blueprint which relied on a product that exists only in the heads of actuaries – the deferred annuity. Now, ten years after opening its doors, Nest seems no clearer about how it is going to give money back to its maturing membership.

Nest’s reticence to properly engage with “decumulation” can be explained by its super conservative approach to innovation. Nest is happy to play at the fringes with sidecar savings and to sponsor any number of studies through its Nest Insight think-tank, but is reluctant to address the big question.

When is Nest going to become a pension scheme?

Nest has been very shy about CDC,  this is another excerpt from its 2012 WPSC submission with the heading

“the scope for collective DC and other risk sharing schemes”

While NEST recognises the potential benefits of risk sharing approaches we believe that well-designed DC schemes can deliver many of the features that make prospective risk-sharing arrangements attractive.

In particular good DC schemes can deliver more certain outcomes for members and deliver similar outcomes across cohorts, so reducing the chances of particularly ‘lucky’ or ‘unlucky’ years to save and retire.

We also believe that by designing investment objectives and the assumptions used to show likely outcomes to reflect inflation, charges and other factors that represent realistic – as opposed to optimistic- scenarios, DC schemes can deliver outcomes more in line with member expectations as they grow their pots.

That final statement needs repeating “DC schemes can deliver outcomes more in line with member expectations as they grow their pots.

It’s worth remembering that the income projections on annual statements are still based on annuity factors. The expectation we give members is of a guaranteed income for life. On 19th March 2014 George Osborne told parliament that in future “nobody will have to buy an annuity”.

How confusing is that?

Since 2012, we have had not use the pension freedoms but a Pension Schemes Act , which in clause 47 has “Powers to extend definition of qualifying schemes” to multi-employer DC schemes such as Nest. Clause 47 means that , with the wind blowing in the right direction from the DWP, Nest could apply to provide scheme pensions under CDC legislation. This would allow pots to be paid as pensions , without anyone having to “annuitize” anything.

A pension scheme paying pensions – sounds good to me!

It is time that Nest bit the bullet and actively engaged not just with industry experts but with its members about what they want from it. Back in 2012 it was clear, Nest provided people with the money to purchase an annuity. That’s why it’s called a money purchase pension.

If back in 2012, Nest could boast that it could annuitize pots as small as £1,500, why was this considered a good thing?  The cost of setting up and paying a pension of maybe £5 per month for a lifetime on an individual basis must have made no economic sense to the annuity provider, but clearly annuity providers signed up to do this.

It would be interesting to see the claims history on Nest from those over 55 and find out how many resulted in payments to annuity providers. I would be surprised if any have ever been paid for £1500 because it doesn’t make economic sense to pay pensions this way.

How much more efficient would it be to pay pensions from a CDC fund?

The answer, according to Willis Tower’s Watson is “a lot”. WTW estimate that a CDC pension should be 70% higher than an annuity purchased from the same pot.

My question to Nest, if it was good to pay annuities from small pots in 2012, why is it not good paying 70% higher pensions from small pots in 2021?

The Nest “retirement hub” makes no mention of pensions.

The Nest retirement hub now gives you the following options (as well as advertising Pension Wise).

These are all good options but the retirement hub does not talk of pensions at all.

Question; When is a pension not a pension?

Answer; when you get to retirement.

As you save, the messaging is about “my pension” and “my Nest Pension”.  But when you retire, it’s all about pots.

Nest needs to provide proper pensions as it implies it will in its website URL    http://www.nestpensions.org.uk. Nest’s messaging should be consistent and consistently about pensions.

It is now the second half of 2021 and section 47 of the Pension Schemes Act awaits a nudge from the Nest policy team.

I am a member of Nest and AgeWage is a participating employer. I want to know why Nest is not providing pensions and when it expects to start doing so. I promise Nest my pension pot (currently nudging towards £600k) if they promise me a pension.

The story in Pensions Age lacks a link to the Nest submission and the submission has yet to be published on the Work and Pensions Select Committee website.

Let’s hope that Stephen Timms , the Committee’s Chair, asks Nest the question I’m asking.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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